Buying Time

Recently the European Union has been building up to the implementation of “crippling” new sanctions against the government of Iran. These new sanctions were finally revealed on January 23 and their primary focus is on limiting Iran’s oil export capability. Despite the strong rhetoric, these sanctions will not truly be effective in the short-term as they bar only new oil contracts with Iran while honoring current contracts until 1 July. Why are we seeing this apparent weakening of the economic hammer against Iran? Why not simply crush Iran into submission and force them into immediate negotiations? The basic answer is that the West is not capable of dealing effectively with Iran right now and needs more time to prepare.

To put it simply, the weaker European nations (such as Greece and Italy) couldn’t survive the speedy implementation of sanctions against Iran. A shock to their economies could plunge them deeper into the current crisis, and immediate full-scale oil sanctions would be more than enough to do the trick. With six months before the full effects of the embargo are realized, the European countries that buy oil from Iran (which accounts for around 20% of Iranian oil exports) will need to find new sellers quickly, especially as Iran threatens to cut off their supply earlier than the July deadline. The shock will not only affect the European economies, but could be devastating to the U.S. economy as well.

A year ago, we saw a small-scale version of these effects with the war in Libya. Once it became evident that Qaddafi was losing stability, oil prices shot up over $11 per barrel by the close of the week ($86.20 on Feb. 18 to $97.88 on Feb. 25). Libya at the time produced about half the oil exports that Iran does, so we may expect a significantly larger overnight spike in price. One blogger on The Economist recently said:

“In 2011, the United States paid about $125 billion more for oil imports than it did in 2010…That “oil tax” was essentially enough to wipe out the entire stimulative effects of Barack Obama’s middle-class tax cut. A similar oil spike this year would cancel out a hefty chunk of the benefits of extending the $200 billion payroll tax cut bill that Congress is fighting over.”

Essentially, we can’t afford to put sanctions on Iran right now, so the West will have to wait until all its ducks are in a row.

While the embargo will go into full effect in July, that doesn’t mean it will be totally effective. Iran isn’t idle, and this same period will permit them time to offset the the effects of the embargo (although finding enough buyers to replace at least 20% of their oil production will likely be next to impossible). They will attempt domestic measures to maintain their economy, as seen with the raising of the interest rate to protect the rial, and campaign to raise foreign support as demonstrated by the Iranian president’s recent trip to Latin America. Although this trip was mostly political in nature, trips like this could easily be turned into economic initiatives to offset the effects of the sanctions.

In the coming months we should see the situation deescalate in four time-buying ways: First, as the West doesn’t need a shock to its fragile economies, and the Iranian government doesn’t want to lose its Navy and key nuclear facilities, we will hear aggressive rhetoric but see less dramatic action. The beginnings of this became obvious as US and British fleets moved back into the Persian Gulf without Iran making good on past threats. Second, the IAEA’s return to do inspections next month will show a continued feigning of cooperation by the Iranian regime. Third, we will probably see indications of an increase in covert operations from US/Israeli intelligence services. Although Stuxnet viruses and the assassinations of scientists are probably finished for now, other means of slowing Iran’s advance toward the bomb will surely be employed. Fourth, parliamentary elections in March could limit President Ahmadenijad’s power and allow less radical “reformers” in to help calm the situation. The next six months will be interesting as we will probably see a neo-Cold War develop as the West and Iran find ways to buy themselves time to offset an armed conflict.